1) A neutron star with an intense magnetic field, capable of emitting toxic radiation across galaxies
2) A hedge fund, the single market player most responsible for the severity of the 2008 financial crisis, through the toxic instruments it created

Rahm Emanuel

1) White House Chief of Staff
2) Politician selected by Magnetar’s CEO to be sole recipient of his political donations, 2006-2008

Strange as it may seem, nearly three years after the onset of the global financial crisis, its greatest, most destructive, and most profitable “it ought to have been a crime” has gone almost entirely unnoticed.

Most people believe that they understand the broad outlines of the financial crisis, and that a central element was an explosion in mortgages made to people who could not afford them.

But how did such destructive behavior occur on such a large scale? The conventional view is that the subprime mortgage blowup resulted from bank
executives being short-sighted, greedy, or both.

But that simple story deters inquiry into how and why this disaster came to pass. Some recognize that the appetite for subprime mortgages seemed to come from investors. In fact, it resulted in a large degree from the way traders at certain large banks used subprime mortgages in a strategy to make their profits seem much larger than they actually were. The effect of this “negative basis trade” strategy was to overpay employees of those banks and consequently eviscerate the banks’ abilities to withstand future economic uncertainty.

The appetite for subprime mortgages was also inflated by people who were betting that the housing market would fail.

Moreover, the devastation wrought by this strategy remains virtually a secret. The fact that it has been almost invisible and appears to have been entirely legal, demonstrates a set of vexing problems. First, that investigations of the crisis have not delved deeply enough, and second, that the deregulation so keenly sought by the financial services industry has made activities legal that by any common-sense standard should be criminal.

But the sponsors of this toxic trade did bother to make sure they had a powerful friend. The head of the firm in question gave substantial amounts of money by political contribution standards to Rahm Emanuel’s PACs, and only his PACs, over the period when these transactions were in play.

The moving force behind a brilliant and devastating subprime short strategy was a heretofore unknown Chicago hedge fund, Magnetar, headed by Alec Litowitz, formerly of the hedge fund behemoth Citadel. Our studies indicate that Magnetar alone accounted for between 35% and 60% of demand for subprime mortgages in the year 2006.

This is how their strategy worked in detail.

The ruse at the heart of their transactions was creating subprime (so called “mezz” or mezzanine) collateralized debt obligations by investing in the riskiest layer, the so-called equity tranche. This kind of CDO consisted almost entirely of not just any subprime risk, but that of the dodgiest layer that could be sold short, the BBB tranches, via a combination of actual bonds and credit default swaps.

But Magnetar’s true objective was not to invest in this toxic waste, which its role as funder of the CDO would lead most to believe. While Magnetar paid roughly 5% of the total deal value for its equity stake, it took a much bigger short position by acting as a protection buyer on some of the credit default swaps created by these same CDOs. This insurance in turn was artificially cheap because over 80% of the deal was rated AAA. Most investors did not understand what Magnetar recognized: this concentrated exposure to the very riskiest type of bond associated with risky mortgage borrowers, each of these CDOs was a binary bet. It would either work out (in which case Magnetar would still show a thin profit) or it would fail completely, giving Magnetar an enormous profit and wiping out even the AAA investors who mistakenly believed they were protected by having other investors sit below them and take losses first. Thus the AAA investors were only earning AAA returns for BBB risk.

As the equity investor, Magnetar could further stack the deck in its favor through the influence it gained over the deals’ parameters. It was able to ensure that the CDOs held particularly dubious BBB exposures, and pushed for, and often got, “triggerless” structures, which stripped away another protection most deals had. When CDOs start to show significant losses, the payments to the lower-tier investors, including the equity tranche, are cut or halted to defend the AAA layer, much the way the human body, when exposed to severe cold, will restrict blood flow from the extremities to save the brain and organs. But triggerless deals, even as they started to fail, kept paying the lower tranche holders, including, in this case, Magnetar itself.

While these transactions may sound similar to the widely decried Goldman synthetic CDO program, Abacus, by which the firm went short various real estate exposures, effectively dumping the risk on customers, the Magnetar program was not only much larger, but also produced far more devastating systemic consequences, thanks to the distinctive structure of its CDOs.

As I explain at greater length in my book ECONNED: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism, the use of cash bonds turned mezz CDOs from a dumping ground for otherwise unsellable mortgage bond risk to a breeding ground for demand. Ex Magnetar-inspired appetite, it is hard to find an explanation for the widely-discussed phenomenon of 2006 and 2007, of the mortgage securitization pipeline screaming for more subprime product, precisely when Federal Reserve interest rate increases should have stanched demand for risky loans above all others.

Market participants have estimated that Magnetar’s CDOs drove over 50% of demand for subprime bonds during the market’s toxic phase, 2006 and 2007. With the input of a team including professionals who have worked on some of these trades, ECONNED, we’ve performed repeated, conservative analyses that indicate the true figure is probably at least 35% of demand, and perhaps as high as 60%. And that’s before allowing for the fact that Magnetar’s strategy was imitated by the proprietary trading desks of major dealers. And for good reason. Magnetar made billions, some observers contend as much as subprime kingpin John Paulson, whose fund earned over $20 billion on its short strategy.

And the hedge fund’s cagey bet on Rahm? Litowitz and his wife had never before made significant political donations. In 2005, they started giving to Rahm and his PACs, and only PACs connected to Rahm, just before the Magnetar CDO program began, and continued through the first quarter of 2008, when the trade would have started to pay out handsomely. The Litowitzs gave a total of $8,000 to Emanuel and $10,000 to his Our Common Values PAC in May 2005. In 2006 and 2007, they contributed $51,700 to the Democratic Congressional Campaign Committee, while Emanuel was chairman. We have been advised by individuals involved in political fundraising that the amounts given would be considered significant, and the way the payments were distributed across the PACs is sophisticated. Put it another way: this money was not given impersonally.

But this troubling connection should be no surprise. Rahm has long been a favorite of the hedge funds, having raised more money from them than any Senator not running for President. Not surprisingly, he has been a staunch supporter of the financial services industry, and is widely credited with playing a key role in securing passage of the TARP after its initial defeat.

As the Magnetar-Rahm connection highlights, Obama raised more money from financial services players than any previous presidential candidate, so it can hardly be a surprise that he and his minions are happy to give the industry a free pass. Key policy figures maintain that no one was at fault, that there was a pervasive lack of regulation, and there are therefore no bad actors. That party line also means that destructive behavior is and will remain unquestioned, unexamined, uncorrected, and unpunished. We are still paying for the costs of the financial train wreck of 2007 and 2008. We can no longer afford the costs of willful blindness.

Addendum: Hat tip to Corrente who posted on this relationship on April 11, and finally prodded us to post our writeup of this story. We worked closely with Moe Tkacik on the story she put up on DailyFinance and took down, and had held off publishing our version pending her releasing her final version.

do you have any comment on their claim that “Notably, focusing solely on the group of CDOs in which Magnetar was the initial purchaser of the equity, Magnetar had a net long notional position. To put this into perspective, Magnetar would earn materially more money if these CDOs in aggregate performed well than if these CDOs performed poorly.”

that claim seems to conflict directly with what you wrote above: “each of these CDOs was a binary bet. It would either work out (in which case Magnetar would still show a thin profit) or it would fail completely, giving Magnetar an enormous profit and wiping out even the AAA investors who mistakenly believed they were protected by having other investors sit below them and take losses first.”

Yves is brewing up a response right now, in between chewing horribly scented gum.

Had to do the Rahm thing first – been sitting on it for ages politely waiting for Moe T to do her version, then the alert corrente did their own homework.

You have of course homed right in on the key point (have you read ECONned??). Odd – the macroresilience piece gets the idea of the trade, but doesn’t spot the BS in Magentar’s response. We think we can fix that…

Bit of polishing and cussing from Yves and we’ll have something up in an hour or two I should think.

especially for this explanation of why Magnetar wanted the riskiest equity tranches they could get (due to the binary skew of the outcome):

“So what does all this have to do with Magnetar’s desire to include riskier assets in their long equity portfolios? If one believes that only a small perturbation is required to tip the market over into a state of collapse, then the long position should be weighted towards the riskiest possible asset portfolio. Essentially, the above framework implies that there is no benefit to having safer “long” positions in the long-short portfolio. The fragility of the system means that either there is no perturbation and all assets perform no matter how low-quality they are, or there is a perturbation and even “high quality” assets default.”

I used to think there was a difference between the parties. I mean, I really thought that there was a fundamental philosophical difference in how Democrats and Republicans governed. But this particular clusterf*ck has roots going back to the Clinton administration, continued by the Bush administration, and further enabled by the Obama administration. This post clearly illustrates that there no difference in the results, regardless of who is in power.

In the meantime, the population is distracted by the class envy arguments being put forth (wealth inequality, income redistribution, etc.) by the parties through the media, but the truth is really this: it’s not the wealthy trying to enslave the population, it’s the government. The wealthy are just the tools being used to accomplish the task, by both sides. It’s no longer “of, by, and for the People”, but a consolidation of Federal powers enabled by crisis after crisis after crisis.

I used to think it started with Clinton too, but I was surprised to discover that neoliberalism started out rather quietly under Jimmy Carter (via his financial advisors and political backers), the first corporatist Democrat, and then came out in a much stronger Republican flavor via Ronald Reagan. Clinton tried to do a kinder, gentler form of corporatism than Reagan and then came Bush Jr’s special neo-con version of neoliberal economics. IMO, corporatism and it’s cousin neoliberalism have been cultural trends for some time. Blaming any particular political party seems rather pointless as it has to do with financial belief systems of the elites who decide on candidates to back their agendas, while spouting party line memes for the party faithful as part of divide and conquer.

“The wealthy are just the tools being used to accomplish the task, by both sides. It’s no longer “of, by, and for the People”, but a consolidation of Federal powers enabled by crisis after crisis after crisis.”

Sorry, dear. The people who pay the money are the buyers, and the ones who take money are bought. Business executives don’t retire to cushy government jobs, our officials retire to cash in without shame to the private sphere. Elected officials don’t sit around exclusive clubs mocking corporate CEOs, it’s the business types who laugh up their sleeves.

I think this is the crime other writers have called “financial arson.” If so, that’s an interesting analogy. Arson is a crime of changing neighborhoods, places going seedy and being deserted by productive citizens. It’s a last quick score on assets that would otherwise go to nothing. In other words, America is Detroit.

“the way the payments were distributed across the PACs is sophisticated”

can you be more specific? i thought the whole point of giving money to a party’s ‘campaign committee’ was to avoid the impression that you were targeting specific congress people?
here is the FEC.gov stuff for ‘litowitz’ in illinois.

This may shed light on Oh-Bummer’s continued obeisance and genuflection to Israel as well as his prostrations toward Wall $treet . The Litowitz connection may relate to Eretz (greater) Israel.

Rahm Emanuel’s pappa is a Zionist and former member of Israel’s Irgun paramilitary (terrorist group). Shortly after Oh-Bummer’s election win, he said of Rahm’s role for the new-boss-same-as-the-old-boss, “Obviously he’ll influence the president to be pro-Israel. Why wouldn’t he?” “What is he, an Arab? He’s not going to be mopping floors at the White House.”

Rahm also recently called progressive’s intent to target conservadems blocking public-option helathcare “fucking retarded”. Perhaps a better question would be, “what has he not been willing to do for all that blood-money bribery?” He and his boss slither on their bellies.

doug i am not cool with this whole ‘israeli conspiracy’ thing. please don’t take my posts and turn them into some anti-israel screed. israel has a damn good reason to influence US foreign policy, its called the MS St Louis.

Sorry, I did not take your post and turn it into anything; it clearly stands alone and is not ‘tainted’ by my “‘Israel conspiracy’ thing”.

You left an open question, to which my factual point, the overtly racist quote by Rahm’s father, who lives in Israel, may or may not have a bearing. Another is that Rahm Emanuel, who has dual Israeli-American citizenship, also volunteered to serve in the Israeli IDF. Joining a foreign army, says a lot about one’s loyalties and may be relevant to Emanuel’s motives.

I do not know that the Litowtz or Magnetar have any Zionist agenda or that there is any quid pro quo there, so that was admittedly a stretch. But scratch the surface of many of our conflicts and security costs, and you will often find Israel there. No conspiracy theories needed.

“This may shed light on Oh-Bummer’s continued obeisance and genuflection to Israel as well as his prostrations toward Wall $treet . The Litowitz connection may relate to Eretz (greater) Israel”

You a freaking moron. Øbowmao is the most anti-Israel Present-dent we have ever seen. Rahm Emanual has helped him screw both America and Israel, in the latter case by tying American sanctions on Iranian nukes to forcing Israel giving up 1/2 of Jerusalem and more its territory to the ihadi scum (who you probably suck eggs with).

And by the way, Achmed, or Adolf, or Wayne, or whatever your bunker name is, “eretz” = LAND, not “greater”.

Now go pick up your check from Al Queda before they find out how stupid you are.

Agree 100% with you. Amazing how you are being shut down already as you venture into the forbidden zone. These people have brought this country to ruin with their financial and political shenanigans. This is all an effort to shore up dirty little Izzy. When will people see the light.

There is, as far as I can tell, NOTHING suspicious in those donations and not even a hint that there was any quid-pro-quo. All we have is some arm waving and utterances of “Rahm” in a spooky voice to convey the impression that something sinister is going on instead of just some evidence free sliming.

BTW: the claim that “And the hedge fund’s cagey bet on Rahm? Litowitz and his wife had never before made significant political donations. In 2005, they started giving to Rahm” is just false. Litowitz gave $10K to the DCCC under Matsui prior to starting Magnetar. There is zero evidence of a “cagey bet” of any type. This is just free standing character assassination.

Thank you for “illuminating” the special relationship with Rahm. Reading it kind of makes my skin crawl, but at least I have a better understanding of the current administration’s apathy about this entire con.

Say Yves, I think you need to revisit the Michael Lewis Big Con story and continue your debunking. It’s important for the public to realize what a scam he is perpetrating with that book. I haven’t had the stomach to actually buy it, but I did read an excerpt from the latest Vanity Fair. This piece, featuring the Michael Burry character, actually contradicts claims made by Lewis in his earlier Vanity Fair piece on Joe Cassano and AIG (August, 2009: The Man Who Crashed the World).

In the Cassano/AIG story, Lewis claims AIG had no idea what was in the CDOs that they were insuring. But then in this latest piece, he credits Burry with actually “inventing” the CDS on specific subprime mortgage bonds, which he arranged directly with Goldman Sachs (which they then supposedly had AIG “reinsure”, or something to that effect).

So this raises an interesting question: how did Goldman fool AIG into insuring CDOs they knew nothing about – when Burry was supposedly very specific about the bonds he was betting on?

There’s a number of other problems with his account, but it all lends credence to my own contention that Lewis is a propaganda-meister, and I think there is good reason to suspect anything he prints or promotes.

There’s a number of other problems with his account, but it all lends credence to my own contention that Lewis is a propaganda-meister, and I think there is good reason to suspect anything he prints or promotes.

Rahm Emanuel was a Congressman, the fourth-ranking House Democrat. This does not change the fact that there are power and money ties between the Corporate and Political Elites.

The real question is how the United States got hit by the greatest financial crises since the Great Depression.

Two reasons: Greed and Religious Ideology. The Elites grabbed the money. The Enablers deregulated the financial industry. Stealing investor’s money is not a crime today.

WaMu’s government regulators informed DC Headquarters of their financial irregularities but the revolving door and political contributions assured that the Corporation had a free hand until it collapsed the American housing market.

… this comment was intended for Alex, who was responding to Lee Anne’s first in thread comment; “wake me up when these fellas start talking fraud.” (good comment Lee Anne) in the Ed Harrison post; “The Origins of the Next Crisis”. Best to you all and keep up the good fight …

Its a very well planned and orchestrated intentional global take down of the underclass and middle class. Forgiving it for sheer ineptness of the charlatan VOODOO ‘economists’ is either naive or apologist bullshit!

Governments are captured by the central banks of the ruling elite and thereby rendered non responsive to the will of their respective citizens.

The elite and their central bankers, and their hijacked governments, are going about their take over through debt trapping the entire planet through the use of captured media and an army of sell out, VOODOO SCIENCE ‘economists’ (read fucktards whose only claim to fame in life is to create ever more complex derivative variations of debt traps — easy credit — that mask the deceptions, the over leveraged dangers, and the selective placement of that easy credit.

Debt traps (easy credit) are intentionally and selectively deployed not to assist the debtor and extract a ‘reasonable’ profit, as in the good old vanilla greed days, but now, in the newer more pernicious greed world that we live in, to control the debtor by pitting his less prudent consumption against his prudent neighbor’s consumption to create intentional rifts. Easy credit is being use to divide and conquer us all by putting us all in a well planned and executed perpetual conflict with each other. The comments in this post, the post itself, and many other posts at NC, are testimony to how well the scheme is working.

The really superfluous VOODOO ‘economists’ (similar to those who create intercontinental ballistic missiles and nuclear weapons in the military industrial complex), work to justify the existence of their sorry ass, sell out, scum bag jobs and products, and so get involved in the factional wars justifying one weapons system versus another (vanilla greed vs pernicious greed).

The reality is that it really is a Military Banking Complex, and it is in effect more powerful and more damaging to humanity than the Military Industrial Complex, because its weapons — easy credit and its many derivative variations — are being fired and exploded right now, in real time, all over the planet, and enslaving, exploiting, and eliminating, large portions of the world underclass and middle class.

This stuff can be hard on the soul and injurious to the spirit. Take a break for rehab, but please dont’ go. Your intensity of caring, your brilliant wit, and even your refreshing vulgarity are most appreciated and would be too sorely missed.

We had given Moe the lead on the Rahm connection, but to her credit, she did an impressive amount of reporting (as in proving out our analysis of the trade and putting considerable color on the Rahm angle).

My understanding was that it was not supposed to be posted when it went up (in fact, our Richard Smith found that it was up, with “Hold” on it, and I alerted Moe). She had it completed from her perspective, but as a matter of protocol wanted to give Magnetar the opportunity to comment before it was published. They had hired a high-powered PR person with a journalism background. Moe and he had at least one substantive conversation and then seemed to engage in protracted phone tag. I was getting the impression he was simply trying to string her along as long as possible. Given that Magnetar clearly knew at that point that ProPublica had a major story in the offing, this appears to be an effort to limit the number of critical articles that would come to light.

Thanks for the excellent work. I suspect the MSM will never pick up this story so please work with Ms. Tkacik to ensure this story has maximum exposure (i.e don’t give Magnetar a prolonged opportunity to use delaying tactics to bury this story.)

Please at some point cross post this article to Huffpo, DailyKos, etc, all other non-MSM methods, along with linking previous posts on the excessive biasing Wall St linkages of other key government players such as Paulson, Geithner, etc. It’s only stories such as these exposing the current appalling corruption in our economic policy and regulation which can force real reform.

She had it completed from her perspective, but as a matter of protocol wanted to give Magnetar the opportunity to comment before it was published. They had hired a high-powered PR person with a journalism background. Moe and he had at least one substantive conversation and then seemed to engage in protracted phone tag. I was getting the impression he was simply trying to string her along as long as possible. Given that Magnetar clearly knew at that point that ProPublica had a major story in the offing, this appears to be an effort to limit the number of critical articles that would come to light.

I admit I don’t understand this. It sounds like you thought there was a non-zero chance of a different result.

“A matter of protocol…” Well, maybe one of these days those who seek to act in the public interest will stop hobbling themselves by adhering to rules they know the enemy will never abide by.

Sorry if there’s something I missed, but these explanations sound like nothing but that.

I’m puzzled at your remark. ProPublica contacted Magnetar. Moe has a journalistic background. While it is normal for bloggers to opine without contacting the subject of a story, my understanding of journalism norms is that that behavior would be seen as unusual, maybe even unprofessional.

Re the PR guy, yes I was very puzzled at her indulging him to the degree she did, since everything in her piece was backed by third party sources. I asked her how long people like her normally allowed the subject of an article to provide a comment, since she seemed to have allowed more than enough time by any usual standard. She had indicated it often depended on how much of a hurry the journalist was in, and could be as little as 24 hours.

She had gotten very busy with other deadlines, this clearly affected her focus. And frankly, Rahm had been a hot topic before the health care bill passed, and seemed to die down. Moe may have thought this piece could wait.

I can only explain what happened from our perspective. I am not a mind reader.

Sorry. I just meant it didn’t seem to explain why they’d take down the piece after posting it, if it’s clear by now that Magnetar was just stalling.

Regarding the journalistic protocols, I guess by now I think where the corporate media is so clearly waging ideological war on behalf of the rackets, what little public interest journalism is left needs to also take off the gloves to some extent. Offering them a chance to comment before publication, fine. But unless that’s with the expectation that they’ll only try to stall and obfuscate, and with a firm deadline, it really is extending courtesies they’d never extend back.

The idea of lending money which would never be seen again was originally a banking solution to government efforts at curbing red lining. I had a conversation with a (now deceased) major S&L officer way back in the early 1990s. I was told a couple of things: 1. it’s cheaper, and better advertising to build a bank building than it is to simply advertise; 2. “If you’re going to service prime areas, you have to make loans in less desirable areas as well. What the heck! The bank is going to make a certain percentage of bad loans no matter where they lend. Why not just allocate a certain portion of capital which would be lost anyway, and just lend in those government supported areas?! Brilliant, thought he. And, once one gets to talking in terms of ‘why not’s’ anything becomes possible. Why not securitize those loans and sell them off? Love it!! ‘Why not?’ people ask. Some say, ‘Let’s do it again, before someone who understands all this is elected!’ Losses are like rain. They come every Spring season.

All these learned opinions from the expert brains. Which brings something to mind of late I’ve been pondering.

Who do you think is the smartest “economist-type” out there?

After much perusing, listening, and lurking, I’m leaning towards Yves these days. Overall from micro to macro she’s just superb isn’t she? (No, this is not a brown nose manuever either you smart asses. Ok, ok, I know what you’re thinking. Maybe just a little rubbing is all. But hey it’s deserved rubbing.)

I on the ball: I wish you would reconsider your withdrawl from NC posting. We are probably only at the beginning of this crisis and we need as many dedicated souls as possible to figure a way out.

I’ve learned the hard way in my own life that I don’t have all the anwers (although I often like to think I do). A final closure on this issue of power an how it really operates may not be attainable. Wisdom, perhaps, comes from how we conduct the search not in the specific results we attain from it.

If one is able to engage in coversations with others, converting all of one’s partners into teachers as well as students then maybe one is on the right path.

Your insights have been of great benefit to me–lets continue the debate!

I would love to engage you more on the issue of who really controls things (i.e the exact nature of our present elites)

I need to read more, but who provided the CDS to this scam? They were defrauded. Why no clawback lawsuits? Is it possible that the entire enterprise was a scam – that is – the officers of the reinsurance company (AIG?) were themselves bought off – or their compensation packages shaped in such a way that they were encouraged to defraud their own companies? If AIG paid off on Magnetar’s CDSs, wasn’t the U.S. government defrauded? What did Rahm know, and when did he know it?

This story places the issue in the White House. Are Yves and Moe ready to do Woodward and Bernstein redux? Am I the first to coin the term Magnetar-gate? Ladies, you are at the beginning of a HUGE story. I hope you stay with it.

So, in response to your question were AIG officers bought off, I think you are absolutely correct. I suspect the officers and senior management all agreed to convert AIG into the toxic waste dump for garbage assets that couldn’t be sold without revealing the extent of the fraud committed in the creation of same.

I think that also explains the otherwise incomprehensible “retention bonuses” paid to AIG-FP employees. They couldn’t exactly disclose that the payments were really hush-money.

It may also be that AIG was already in deep trouble with some other still undisclosed scheme that threatened the company’s financial security anyway. Prior to their demise, AIG-FP was heavily promoting various commodity-linked ETFs on the London Stock Exchange. In fact, Joe Cassano headed up that project, but interestingly none of the reports mention this fact.

I think the omitted details are the most telling. But it would certainly make sense that with AIG’s long history of fraud and financial irregularities that they were caught in another of their scams, and offered a Get-Out-Of-Jail-Free pass, in exchange for a rather large favor.

“Institutions will try to preserve the problem to which they are the solution.” – Clay Shirky

and this:

“Transformative change happens when industries democratize, when they’re ripped from the sole domain of companies, governments and other institutions and handed over to regular folks.” – Chris Anderson

The technologies of credit creation and finance must be opened up. And it’s no use waiting for governments to do a decent job of it.

This may be an investigation for another day, but it would be interesting if any of the GS partnered Magnetar deals found themselves in the negative basis books of these counterparties through the dynamic management process used in the Davis Square deals.

Recall the Davis Sq deals ended up with replacement drek guaranteed by AIG,and that the Davis SQ deals ended up in negative basis (or as AIG described them Reg arb) books at the Euro banks.

Magnetar’s total contributions to Emanuel et al seem to be less than $100,000 total over 3 years. A lot of people backed the Obama campaign, including, I think, Soros. Compared to the millions the campaign would have cost, $100K doesn’t seem an awful lot, which casts some doubt on the implication of direct political influence by Magnetar.

I have no doubt that the Financial Services sector is working very hard to influence policy, and to minimize any “blame” for the GFC.

Moe Tkacik going incommunicado is a concern. It is possible that ProPublica management have pulled the story, which could leave her in a very awkward position.

It is also possible that NC is being set up here, so I think NC needs to be extremely cautious. Sitting on the story until now seems to indicate that you are.

The bottom line is still that, even if Magnetar didn’t “do it”, it could have been done, by Magnetar, other Hedge Funds or the Investment Banks. In the interests of Financial stability, that possibility needs to be closed off by appropriate regulation.

Thanks for the good work.

On another subject, I’m looking forward to seeing output from INET @ Kings. Their Web Site does not seem to report much, and has technical problems.

This is also something like my concern. Lots of people give money to congresscreeps, especially when the congresscreep in question is the Nr. 4 ranking House Democrat and a hometown boy.

As far as “Magnetar-Gate” goes, it won’t fly, because it is too technical. If we have seen anything from recent coroporate fraud prosecutions, it is that the public does not have the patience or background to get “technical” stuff.

They need a simple story, one adapted to a short attention span or another scandal or celebrity wedding or disaster or something will come along, the masses will get distracted and move on. The 24-hour news cycle is of no help in this matter.

Then things really hit the ceiling fan and the masses start looking for scapegoats, frequently marginally connected to the real source of the problem. So it ever was.

Has Rahm Emanuel used his (considerable) influence as House Democrat #3 in 2006-2008 to block moves against Magnetars interests? If we can’t show any action of his in this direction, he seems to be not worse than other people in congress who need campaign donations, i.e. all.

To Magnetar’s trade: It’s like taking an insurance on your neighbor’s house and giving your neighbor bad advice how to protect against fire that you know will come. Illegal, no; immoral, yes, except that Magentar’s neighbor’s were supposed to be sophisticated about fires themselves. As long as they Magnetar didn’t break any laws, I partly admire their trading to exploit the housing bubble. The prosecutors should go after the CDO manager’s instead to see if they violated their fiduciary duty towards investors, among them their own institutions, all for raking in more fees.

“he seems to be not worse than other people in congress who need campaign donations, i.e. all.”

In other words, he’s guilty as hell.

“Has Rahm Emanuel used his (considerable) influence as House Democrat #3 in 2006-2008 to block moves against Magnetars interests? If we can’t show any action of his in this direction …”

And if we can then legally it still means nothing. AFAIK only an explicit quid pro quo is illegal. These people are not dumb enough to do that, nor is it necessary. You’d have to be pretty naive not to understand that large campaign contributions are a way of buying influence, and very few politicians are naive. Those few that are soon find themselves deprived of campaign money.

How could Magnetar not have anything to do with the CDO managers not acting as a proper fiduciary? I hope the govt is squeezing the manager to find out if Magnetar oiled them up.

What I am still not clear on is who was selling the CDS. Was it the purchasers of the CDOs signing up to receive the insurance payments, and counting it as yield? Lost here and the ProPublica piece didn’t help with this part of the trade.

Despicable though that is if true — and I imagine there is more nuance and a separate point of view than that captured in the linked article — I don’t think it’s terribly relevant to this particular scandal. The issues are arcane enough and modern finance sufficiently full of abominable behavior that I don’t want to see detractions from the scandal at hand.

Thinking back to the S&L debacle, we should have prosecuted Michael Milken to the hilt. Instead, we let him walk away from his crimes with nothing more than a slap on the wrist. This sent a message to all future investors that they have more to gain than lose by following in the crooked footsteps of Michael Milken. Michael Milken opened the doors for the Enrons of World, who then opened the doors for the Goldmans of the World. But as long as: 1) moneyed elites are paying ministers of the Christian Right to brainwash many middle-class Americans into believing that they can get much further in the world by sucking up to the rich than by banding together as a single force to regain whatever economic ground they’ve lost from the Reagan years to the present and 2) whatever progress made by both FDR and LBJ towards improving the economic status of our middle class has been all but snuffed out by first Clinton and then Obama and their band of neolib thieves, Michael Milken’s long line of crooked followers will continue to go unpunished for wreaking havoc on the real economy — the place where real products are made and real services are performed.

It can’t be emphasized enough that a lot of the crimes being committed in the financial world today can be traced back to the crimes committed by Michael Milken. So, I truly believe that if all of Milken’s ill-gotten gains had been taken away from him, forcing him to live a life as a pauper, there wouldn’t be nearly as many criminals working in the financials today. But because such a light sentence was handed down to Milken by the courts, enabling him to still live a life as a king to this very day (Forbes in 2007 ranked him as the 165th richest man in America), many of our financial elites today know damn well that the odds are so heavily stacked in their favor of receiving little, if any, punishment for robbing investors blind that they don’t think twice about not conducting themselves as white-collar criminals.

“…through the first quarter of 2008, when the trade would have started to pay out handsomely. The Litowitzs gave a total of $8,000 to Emanuel and $10,000 to his Our Common Values PAC in May 2005. In 2006 and 2007…”

Gee, I don’t know which is worse – the corruption, or Rahm selling his favors sooooo cheaply (maybe he’s not as smart as they say).

That’s my objection to this story. While it is clearly implied that there was a quid-pro-quo, there is zero evidence to support the accusation, and Yves claims that she actually did not make any such accusation.

Good point – my populist outrage got the better of my brain. I don’t want to come off that every politician who gets a contribution is bought and paid for – I think it more likely that Rahm sincerely believes that “credit is the lifeblood of the economy” and buys into the idea that saving the banks is the be all and end all of what has to be done, or at least the first priority – and of course the bankers sincerely believe this as well.

I am not reflexivly anti-establishment, anti-politician, or anti-bank. I come at this from a libertarian philosophy – but I am am not going to let a theoretical philosophy stand in the way of reality. The market either was manipulated, or irrational. Left to its own devices, it seems not to work as well as me or Greenspan used to believe. 10% unemployment is too high a price to pay for what seems no benefits at all from “financial inovation.”

Remind me why Obama hired an bankster enabler to be his right-hand man? Is it the same reason why he hired a bankster enabler to be his Treasury Secretary? If it is, Rahm Emanuel, Tim Geithner and our good-for-nothing president should all be hauled off to the poorhouse to live powerless and penniless for the rest of their sorry lives!

A lot of people are touting ProPublica for this piece as if it were some breaking investigative news. The fact remains that this story was covered by the WSJ and several bloggers back in late 2007 and early 2008. Interestingly they made no mention of this in the piece. In fact they stated that it was one of the great untold stories of the crisis. Only to their readers apparently.

Something smells here. This story has been planted for a reason. The only new news is the Rahm issue I’m reading about here. I get the part about feeding populist frenzies but there seems to be a current of “if it were not for Magnetar” none of this would have happened or at best if would have been relatively mild. It’s not our fault it’s Magnetar’s! Party on dude.

Alec Litowitz was extremely bearish on the housing bubble long before he figured out how to straddle it. I find it as interesting that the Sandlers are funding the “non profit” ProPublica–the same people who made billions on the real estate bubble in California and who to their great fortune sold out right at the top. When you start dressing up old news something is up.

“was a bit puzzled about the ‘it’s all their fault’ tone of the piece”

Just hype for the story. “Here’s the key to the meltdown” sounds a lot more compelling than “another piece of the puzzle”.

“Still, if the connection Rahm-Magnetar is real, then there is a problem for Obama,if it is only to be hoisted by his associations.”

Again, it’s a piece of the puzzle. It doesn’t seem like Rahm did anything illegal in taking the bribes (oops, I meant political contributions), so this isn’t going to be an earth shattering story. It all jives with other things Rahm, Summers, Obama, et al have done though.

BTW, in describing this story as “another piece of the puzzle” I don’t mean to diminish its importance, and I commend Yves and all the others who’ve worked on it. The bottom line though is that the Great Meltdown is not something where there’s one big story of a back room payoff or something. Like prosecuting control fraud and various other “sophisticated” crimes there’s a pattern with lots of puzzle pieces. Unfortunately that makes for poor headlines, but it doesn’t make it any less corrupt. If anything it’s the type of corruption that’s much harder to weed out. The “big story” would be like a tape worm that you can pull out of someone’s intestine and say “here’s the culprit”, whereas this is like a series of not-quite-lethal interacting parasites and infections. Less dramatic, but ultimately far harder to cure.

I think the larger issue isn’t Rahm, but the idea that both legacy parties are owned by the same rentier class. Any conflicts between the parties may play out in public as policy, but in private the parties are simply competing on which rents to offer up. Hence Obama’s early backing by GS, which surprises D loyalists, but shouldn’t, really.

Ah Lambert Strether, still making stuff up to support a faux-lefty political point of view.

Actually, Obama did not get “early support from GS”, something that anyone can validate. Although Obama got a lot of contributions from GS employees the upper management did not support him. In fact, Lloyd Blankfein maxed out to Hillary Clinton. It’s a hallmark of your kind of dishonest hackery to conflate contributions from people who worked in NYC’s largest industry with contributions from the industry.

I suggest you read my book ECONNED before going off half cocked. It contains an analysis of how the trade worked and included calculations of its market impact. These were reviewed extensively by individuals who worked on Magnetar’s and similar transactions. In addition, multiple professionals who were involved in the CDO business independently came forward regarding Magnetar, specifically because it was obvious to them that the trade had played a significant role in stoking subprime demand in the toxic phase.

Moreover, Tom Adams, who has spent his entire career in the mortgage market and has considerable experience with residential mortgage bonds and CDOs, has continued (since ECONNED went to press in October 2008) to test the information and assumptions presented in the book. He has continued to get confirmation of our analysis and has flushed out further details. We have obtained similar confirmation from other experts who have asked to remain anonymous.

Going off half cocked? I am simply mentioning the fact that this “story” was covered in some details by the WSJ and other bloggers in late 2007 and 2008. My complaint is that ProPublica, not you in your book, are dressing it up as if it were new news. To quote, “the great untold story”.

I am further suggesting that the average reader may be lead to think this is some new discovery hinted as fraud. I may read your book for a number of reasons but it won’t be to learn about Alec Litowitz’s trades. Anyone who was following the housing bubble and derivatives knew about these trades. They were basically extreme out of the money puts. The less well funded had to be content short a few housing stocks.

What I am saying is that ProPublica chose this story and dressed it up for a reason. Perhaps its the Rahm connection. I have no idea. What I am certain of, this is old news that throws red meat to the crowd.

On a side note, are you suggesting you only learned about these trades when you were researching your book?

Given your source in Corrente it’s no surprise that this story is complete hack job full of sloppy research and lame insinuations.

First, the assertion the Litowitz had never made significant contributions before Magnetar started is refutable with 20 seconds of research on OpenSecrets. In fact, he gave $10,000 to the DCCC when it was run by Matsui, not Emanuel. So the whole suspicious timing ploy turns out to be bs.

Second, although you openly assert that Magnetar bought off Emanuel on zero evidence, you don’t bother to explain what it was that Magnetar needed from Emanuel or even how he could have plausibly given it to them. The trades were apparently totally legal. So why would they need to buy political protection? From what? It’s not illegal to make winning trades with stupid bankers. And, despite the desperate efforts of Republicans to pretend otherwise, in 2005,2006, the Democrats had ZERO influence over any possible source of trouble for Magnetar- they couldn’t even run hearings in the Congress. What do you you postulate – the Bush Department of Justice was influenced by the Democratic Party Congressional Campaign chair? I’ve read stories involving the Masons and telepathic dolphins that were more realistic.

Get a grip and stop being played by people who want to use the financial crisis to support right wing politics.

I suggest you bother to read before making accusations that are contrary to material that is clearly in the thread.

Corrente was not the source. Corrente picked up the only remaining Google cache footprints on an extensively researched piece by one Moe Tkacik which was mistakenly put up briefly by AOL’s Daily Finance. Moe had regarded the piece as complete and ready to go as of the last I heard from her. I pointed to him out of courtesy, not as a source. I am most certainly not being “played” here, since I was involved in the development of her piece.

The thread also indicates that I reviewed the information with people who are actively involved in fundraising (both on the right AND left end of the political spectrum, I might add), and they saw the pattern of giving as significant. That is also clearly stated above. Are you involved in political fundraising and able to give an expert opinion on this topic? I suspect not.

The post nowhere indicates that there was an explicit quid pro quo. That is your unfounded line of argument. You set up an elaborate straw man with considerable energy to discredit me.

You choose to misconstrue the significance of this connection. Rahm concentrated his fundraising efforts on private equity and hedge funds. The Obama campaign raised more money from the financial services industry than ANY previous presidential candidate. Given this focus, something like this (someone involved in destructive even if technically legal behavior who was also a donor) was bound to happen. It serves to epitomize a disturbing pattern: the lack of real reforms, the lack of even meaningful investigations, and its probable connection to financial services industry donations to the Obama campaign. People rarely cross swords with their patrons.

You make numerous counterfactual claims and then accuse me of “unfounded character assassination”. I suggest you Google the word “projection”.

Oh, so “cagey bet” is just a figure of speech? You don’t think there was a result that Magnetar wanted to obtain? They made a “cagey bet” but it had nothing to do with the business that they were running? Just Magnetar’s business and their “bet” which produces the “definition of complicit” are just two unrelated topic you happen to mention? What was Emanuel complicit in? Taking donation? If you were not asserting a quid pro quo, you certainly worked hard to give the impression that you were.

What is “significant” about the pattern of giving? Spell it out, don’t take refuge in vagueness. Some people may be impressed at un-named sources muttering oracularly about “significance” but those people are spectacularly naive.

You’re being played by people who want to hang the financial debacle on Obama and his “minions” as you put it.

Your efforts to make my turn of phrase mean more than it does is consistent with your straw man argumentation. Pinning your own meaning on what I said doesn’t make it so.

Since you appear to have looked at the records yourself, as I did, your claim re Litowitz’s 2003 donation is disingenuous. A casual look at the history shows a marked shifts in the level and nature of the Litowitz’s donations over time.

If there is no quid-pro-quo, what does “cagey bet” refer to and why do you say that Emanuel is “compromised”? If Emanuel didn’t do anything for the contribution, then what’s the relationship?

And yes it’s true that the donations increased after Litowitz made a lot of money and after the DCCC increased its fund raising. One of the big stories of Emanuel’s tenure there was the closing of the traditional wide fund raising gap behind the Republicans. But your implication is that there is a relationship between the timing of the start of donations and the timing of the trades. At least that’s what I get from “Litowitz and his wife had never before made significant political donations. In 2005, they started giving to Rahm and his PACs, and only PACs connected to Rahm, just before the Magnetar CDO program began, and continued through the first quarter of 2008, when the trade would have started to pay out handsomely.” But since Litowitz gave $10,000 to the pre-Rahm DCCC before starting Magnetar, it looks more like he just donated money to the Democrats like many people in finance.

The problem I have with your story is that it is based on the theory that Rahm Emanuel is particularly compromised on Magnetar due to suspicious donations and you have nothing to back that up. If you want to argue that both parties are unhealthily dependent on money from finance, I won’t argue, but the Magnetar trade seems to have nothing specific to do with Rahm Emanuel. In fact, to me the real misbehavior is from the banks that arranged these deals in hopes of unloading garbage on their customers in defiance of all fiduciary duty and then compounded the bad business practice by getting stuck with the garbage themselves. Clearly the FDIC, the Fed, and the SEC were asleep at the switch, but Rahm Emanuel and Barack Obama were not managing any of those institutions at the time.

rootless_e: “Get a grip and stop being played by people who want to use the financial crisis to support right wing politics.”

Give me a break. AFAIK you’re a regular reader of this blog, so it should be obvious that there’s no hidden right wing political agenda here. I’ve never voted for anyone other than a Democrat in a federal election, and given the choice again between McCain and Obama, I’d still go back and vote for Obama.

Nevertheless if you taking every criticism of a Democrat or someone on the left (at least in a relative sense) as “aiding and abetting the enemy” then the only discussion you can ever have is of a hyper-partisan nature. “Democrats good, Republicans bad” may fly at DailyKos or something, but thankfully the discussions here are considerably more thoughtful.

I wish the Democrats were knights in shining armor, instead of just the slightly lesser evil, but unfortunately it just ain’t so. That’s especially true when it comes to the financial industry.

I’m perfectly ok with critiques of the Democrats. It is clear that from Schumer’s defense of tax breaks to Franks and Dodd to Clinton/Rubin’s time that the Democrats do not have clean hands. What bothers me, however, is claim that there is a quid-pro-quo, essentially open bribery of Obama’s Chief of Staff without any evidence at all to back it up. Yves says that she did not make such an accusation, but when you claim that a financier made a “cagey bet” on a politician that started when a particular trade started, what else could you be saying?

And I’ll add that the reference to Corrente, a site that claimed Obama’s campaign fund raising seemed very much like a money laundering operation and that has been non-stop fake scandal since the primaries, makes me deeply suspicious.

Go ahead, critique the Democrats and Obama on policy, but don’t allege bribery without some credible evidence.

I still think you’re overreacting. Part of that may be my usual POV. To me all large campaign contributions are bribes, not in the criminal sense (which AFAIK requires an explicit quid pro quo), but in the ethical sense and in terms of the plain English definition of the word (which does not require that the quid pro quo be explicit).

Admittedly “cagey bet” is insinuating language, but what’s wrong with making such an insinuation about a bribe?

As for Corrente, I never visited the site before, but even a glance shows that it’s hardly a rabid right wing site, any more than their Firedoglake is, despite their unrelenting criticism of health care “reform”. Moreover, even if Corrente were a rabid right wing or conspiracy site, so what? Sometimes the “other side” finds some good dirt.

The Magnetar story is interesting. The huge wave of finance money in politics is interesting. A story in which the Magnetar trade is described and which claims a “connection” to Rahm Emanuel that reveals him to be “compromised” and which calls donation to the DCCC a “cagey bet” on Mr. Emanuel is needs more than proximity to be legit. As you can see, reading the comments, I am not the only person who saw the discussion of suspicious timing of “significant patterns” of donations as an allegation of quid pro quo. In fact, I don’t see how it is possible to read this story without seeing this implication. And there is zero evidence of anything of the sort introduced. If Yves has evidence of or even strong indications of bribery, that would be very interesting to see. But a nudge nudge wink wink, we know what’s really going on story based on such flimsy stuff strikes me as discreditable.

I’m repeating myself a bit, but I’m sure there is quid pro quo and that it is bribery, but without an explicit quid pro quo it’s not illegal. As I already said, I think almost all large campaign contributions are like that. I’ll even admit that the title of this post is leading, although Yves does have a point about the pattern of the contributions. Chalk it up to a difference of emphasis or overall POV, as well as the fact that overall Yves could hardly be called a Republican (or a Democratic) shill.

What’s the quid-pro-quo? What did Magnetar get from Emanuel? What did he do in return for the bribe? Was Magnetar in 2005 bribing Emanuel to do something as Obama’s CoS in 2010? If they did that, they are pretty damn prescient, but I still don’t get what the “quo” was for those contributions. The implications are dire, but what is it?

rootless_e: “What’s the quid-pro-quo? What did Magnetar get from Emanuel? What did he do in return for the bribe?”

I don’t know. Obviously further investigation is needed, but be forewarned that it’s hard to prove a negative. What does protection money buy? Inaction. It’s tough to prove what the motivation for that is.

“Was Magnetar in 2005 bribing Emanuel to do something as Obama’s CoS in 2010?”

In 2005 Rahm was in congress and a member of the House Financial Services Committee – a very influential position.

Nor was Rahm any stranger to questionable involvement with the financial industry before that. After leaving the Clinton White House he became an investment banker, a position in which he had more background or training, but made $16M in 2.5 years. A regular Renaissance man, eh? He also served on Freddie Mac’s board when the board was notorious for a lack of oversight, and even campaign finance irregularities. The Obama White House has refused a FOIA request concerning details of his actions there. Not that any of that prevented him from later sitting on the subcommittee that oversaw Freddie.

With a background like that it’s entirely reasonable to raise a few eyebrows because one of the biggest actors in the Great Meltdown directed much of its campaign contributions at him.

Is it proof? Of course not. But would you trust a man like that to influence regulation of the financial industry?

“In 2005 Rahm was in congress and a member of the House Financial Services Committee – a very influential position.”

No. Being a member of the Democratic Minority in the House in 2005 did not give you much influence. Sorry, but the fact that the Republicans controlled all three branches of government during the worst part of this disaster and that they were in no way interested in listening to Democrats is something that can’t be pretended away, no matter how hard Frank Luntz tries.

So, in summary, the case is that Magnetar’s management, like much of the financial industry management at the time, gave tens of thousands of dollars to the Democratic party and we know it was a bribe because, well, we don’t like Rahm Emanuel. That’s really the definition of weak, to steal a phrase.

But what’s perfect is the invocation of the Freddie Mac “fake scandal”. The IG and a number of independent investigations have cleared everyone. But since Grover Norquist and friends have ginned up that as a fake scandal, it helps build the factesque case for this scandal. It’s a pattern of unsupported allegations all given wide circulation by the Mighty Wurlitzer. I wonder when Vince Foster will pop up in this story. Some cocaine shipments from Mena?

Yes, because people give hundreds of thousands to politics because they expect nothing in return, and Rahm of course whose whole position in politics is due to his fundraising prowess could never be accused of taking money except for the public interest.

The trade could certainly have gone against them. Part of the reason a lot of funds blew up in early 2005 was because people had this trade on in corporates (long equity/short mez) and the autos/supplier ran into trouble, while most other companies were pretty untouched. This blew out equity while mez stayed relatively tight.

In the mortgage case, it obviously didn’t work out that way, since everything went bad, and with hindsight it seems that that’s the way it had to be, but this was certainly not obvious to everyone at the time. It’s not even obvious now that things couldn’t have turned out differently if, say the risks were not as concentrated in the banks and aig.

@rootless_e: Before you start accusing Yves as being played by right wing guys against Obama, you need to go back to and read Yves post when Bush was in power. She was the same critical self. So for you to think Yves is a rube to be played by wingnuts is a myth.

Regarding your assertion that Litowitz was just a Democrat-loving, high living hedgie who happened to give hundreds of thousands of dollars to DCCC (and Rahm) without expecting anything in return, is laughable. Who’s the rube here?

This is a very important story that Yves and others are following. Either try to understand it or stay away from it with your nonsensical assertions.

Your assertion is correct if you think a one-off donation of $2,000 to Kerry is just as significant as three years donations of $100,000 to Rahm PACs. You could be *absolutely 100%* right about that, of course. Bwahahah…

Yes, your assertion is correct, but it doesn’t make your case, or damage Yves. You sound like a right-winger who’s found a minor error in climate science. Yes, it’s an error. But it doesn’t discredit the whole argument. If anything, the contribution supports, rather than undercuts, Yves case.

It is interesting to read the postings and the comments. It would seem that the rich are very effective at deflecting focus on their control of society. They have folks tilting at the Democrats and Republicans like they are battling for good versus evil when they are in fact, currently both evil or at least overly complicit in their enabling of the rich over the poor.

It seems that the rich have co-opted so many wannabee rich folk and the religious fundies that there will be no end of fake focus on the real problem with the economy….the wrong mindset.

Can anyone tie the entities driving the CDO creation to fraudulent activities at the mortgage brokers or investment bankers?
Bear raid tools have seemingly included moles at target companies, as well as unfilled short sales, credit default swaps and selling synthetic CDOs.